SPX Update and More: Market Playing Its Cards Close to the Vest

I believe it was Yogi Berra who said, "It's tough to make predictions, especially about the future."

The market has now reached a point where it clearly does not want to telegraph its next move.  There are times, when the larger trend is clearly defined, that the short-term wave structure isn't an issue.  This is not one of those times.  The larger trend for the year is still down.  The question remains: is the intermediate trend still up, or has it turned?  Early indications favored a turn, and I continue to believe that the top is either in, or very close.

Usually when the intermediate trend becomes hazy, an examination into the shorter time-frames can reveal some answers.  But after Monday's action, a short-term examination reveals total mayhem in the charts.  Since the November low, the market has range-raced repeatedly, and generally refused to provide any meaningful pattern. 

The market appears undecided.  It's as if the market is saying to itself, "Hmm.  Well, Europe seems okay for the moment; but it's still a disaster over there.  The economy doesn't seem terrible; but it doesn't seem too good either.  The Fed seems clueless; but at least they're not doing too much damage right now.  Decisions, decisions!"

At this point, there are so many potentials, it is very hard to narrow the future down to one likely path.  Despite that, I continue to favor the view that the next move is down.  I favor this due to sentiment, and also because that's what appeared most probable the last time the market looked semi-clear.  I must admit that my faith in this view has been shaken somewhat at this stage, so I've assembled a battery of charts for you to examine as well. 

The first chart I'd like to present is an old favorite indicator of mine, which I haven't had occasion to use in a while.  This indicator compares the volume on the Nasdaq as a ratio to volume on the New York Stock Exchange.  When investors get into "risk on" mode, more money pours into the Nasdaq.  As a result, the ratio is low near bottoms, where investors are behaving cautiously and putting less money into the "risky" Nasdaq; and high at tops, when investors are feeling invincible. 

As you'll see in the chart below, when this ratio hits 2.6 or higher, it's an excellent indicator that a top is very close.  My speculation as to why: near the top, it seems the last bit of capital is racing in to chase the long-shot, high risk stocks.  Over the past 3 years, this indicator has nailed tops (within a day or two) 9 out of 10 times.  Also worth noting, the current reading of 2.96 is an all-time historic high:

The above indicator presents a very good argument that the top of this recent retracement rally is pretty darn close.  Add that to yesterday, when we looked at Rydex funds, which are also showing sentiment is extremely frothy.

The next chart is a simple support/resistance chart of the Dow.  Sometimes when the counts become temporarily hazy, it's best to rely on classical technical analysis.  The chart is self-explanatory:

The next chart is the updated Apple chart.  Apple continues to look like it wants to make new lows.  The red line is the knockout for blue i as labeled on the chart.  I am convinced the blue "1" (below the red "ii") is an impulse wave, so I would expect if the alternate count unfolds, price should not exceed the red "ii" top.

Next up, the SPX chart, which has devolved into a confusing mess, along with most of the other indices.  I am favoring the view that we will see a little more upside on Tuesday to complete wave (z), of a rare formation called a "triple zigzag."  I would expect a reversal soon if this view is correct. 

The alternate view, in black, sees the double zigzag, labeled (w) (x) (y) as having completed wave (a).  Yesterday completed wave (b), and wave (c) is in progress now.  If (c) = (a), that would target roughly 1288 as the high for this move.

The NDX is in a similar position, with similar possible outcomes.  The difference is the NDX seems to be completing wave c of an expanded flat, which would then complete (z) of the triple zigzag.  (Is everyone thoroughly confused yet?  With the charts this messy, this is the best I can do for explanations, short of writing a book.  Sorry.) 

Next, the Philadelphia Banking Index (BKX).  The BKX is one of the few charts that looks semi-clear right now.  Interestingly, the BKX also seems to indicate that this is a fourth wave correction, not a second wave.  I have labeled it accordingly.  When the November decline first occurred, my instinct was that we still needed a fourth wave to complete the wave down.  Although I have the retracement on the prior charts (SPX and NDX) labeled as red wave (ii), there is still nothing to rule out the fourth wave option in any of the indices.  Note that the blue i and ii on the BKX chart represent the subdivisions of the larger wave 5.

Assuming the market heads down in the near future, we should be able to determine whether it's the start of wave (iii) down or the end of wave (i) down based on divergences in RSI and MACD.  For the fifth wave, we would expect positive divergences to develop in these indicators as new price lows are made.  If it's a third wave, we would instead expect to see momentum increasing.

 
And finally, the bullish alternate count.  This count continues to hang in there at 30% odds.  I am not yet favoring the bullish outcome.  For me to begin expecting a bullish outcome, the market is going to need to put together a stronger rally, with more impulsive looking waves than it has done so far.  It's certainly possible, and I'm not ruling it out -- obviously.  Ruling it out would be 0% odds.  But I'm not favoring it until the market gives me more concrete reasons to do so. 

The final wave up in this bullish count could end beneath the October highs, or run as high as SPX 1330 or so.  In ending diagonals, the final wave is almost completely unpredictable.

Short term, the market really needs to show some more structure before we can conclusively eliminate some of these counts. 

I'm taking a stand anyway, and continue to favor the view that the next short-term top is very close.  My preferred view is that we'll see a reversal begin at some point tomorrow; my first alternate is that we'll run up very close to the October 27 high before reversing.  However, at this moment, I'm far from certain of those conclusions, and they may well be proven wrong over the next several sessions.  Personally, when the market becomes this indecipherable, I don't try to front-run the move with my trades.  I stay in cash until the market reveals its intentions more clearly.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and Dow Update: Sentiment Still Favors the Bears

Sentiment continues to remain bullish, despite the declines in the averages last week. 

Rydex funds are reaching ridiculous extremes.  Rydex funds offer a good proxy for retail investor sentiment; retail investors are small money, and for lack of a better, more politically-correct term, are somewhat considered to be "dumb" money.  Retail investors usually tend to be "late to the party," so to speak.  So what does retail investor sentiment, as indicated by Rydex, look like right now?  Here's a snapshot: 

Rydex bear fund asset flow levels have dropped to readings not seen since at least 2008 (hint: these levels are lower than any seen during the entire bull run, including the March '09 bottom).  Conversely, the Rydex bull fund asset flow has now risen to levels not seen since at least 2008.

That bears repeating:  Rydex bull fund asset flows are now at levels not seen at all during the prior bull market, including at the March '09 bottom.  What does this tell us?

It tells us that retail investors are rabidly bullish right now, more so than they have been in years.  So why does that matter? (Warning: some of the upcoming is stuff my more experienced readers already know.)

These types of extreme readings are generally good contrarian indicators.  Contrarian investing is based on the concept that people act on their beliefs: when the majority of people are bullish, it usually means they've already bought stocks.  Obviously, the stock market is controlled by the same principle as any other free market: prices are determined by supply and demand.  When there are more buyers than sellers, prices rise; when there are more sellers than buyers, prices fall. 

So if the majority of small investors are bullish now (as are the majority of large investors), that means most of those bulls have already placed their bets on the market rallying -- which means the market is losing more buyers by the day.  Eventually, this lack of buyers will leave prices no choice but to respond by heading lower.  When buyers become scarce, prices will fall even if selling doesn't increase.  

As prices fall, more of these former buyers become sellers.  Really strong declines are marked by increasing momentum -- usually the middle of the third wave (at any degree of trend) is when selling pressure really starts to peak, as more and more investors unload their positions into the falling market.  Eventually, as a bottom approaches, people are bearish again, and the whole process starts all over in reverse.

It's the great Circle of Bear and Bull life.

Market psychology seems to reflect the natural cycles of the universe: when the sun reaches its zenith, it can only descend.  Likewise, winter is followed by spring, yet inevitably returns.  A star may be born from the ashes of former stars; years in the distant future, it may explode as a supernova -- and from its remains, new stars are born.   Humans go through a similar life-cycle (although few of us actually explode, as far as I know). 

The only constant in the universe is the self-renewing cycle of change.  As a result of the undeniable realities of our existence, these cycles, patterns, and rhythms are deeply etched into our psyches and behaviors; and our markets end up reflecting these patterns.  Or perhaps market waves and cycles are not simply a reflection of us, but are instead part of the cyclical natural order of all things.

What never ceases to amaze me is the way most people project the future in only a linear fashion, despite the obvious cyclical nature of things.  If the market goes up for 10 days, suddenly the average investor believes it's going to go up forever.  Likewise when the market goes down for a time; suddenly people act as if it's going to zero.  Very few things in this world move in a linear fashion.  Everything from our love relationships to our business careers seems to oscillate in waves and cycles.  The understanding of this is what separates the smart-money investor from the average investor (and separates the average investor from his money!). 

Anyway, back to sentiment.  

I don't view contrarian investing as a means in itself, for the simple reason that in bear markets, sentiment can remain depressed for a long time -- just as the reverse is true in bull markets.  So, in my view, sentiment is more of a confirming indicator.  Where sentiment becomes the most valuable is when it reaches extremes; especially when such extremes are disproportionately reversed from the market's primary trend.  High bullish sentiment in a bear market is a very dangerous thing; although, again, it can remain elevated for a time as part of the topping process, and, of itself, doesn't necessarily portend an immediate reversal.

I personally believe we're in a bear market -- so I believe the current bullish sentiment is confirming what the charts seem to be suggesting: we are on the verge of a new leg down.

Anecdotally, most traders I know continue to talk about a year-end rally.  It seems many investors are hoping Santa Claus will come down the chimney and deliver liquidity to all the good boys and girls.  (What should worry everyone is who is actually on Santa Claus's list... remember, he knows who's been naughty and nice!)  But I tend to agree that we might see a year-end rally -- I just think it's going to start from lower levels.

The charts are continuing to suggest that the snap-back rally off the November lows will eventually resolve to the downside.  The exact level from which this resolution will begin is somewhat challenging to nail-down, however.  Below is my best guess chart of the short term count:

If this count is correct, there may or may not be a little bit more upside due on Monday.  My count of the smallest time-frames indicates that Friday might have marked another short-term top, so a gap-down opening on Monday is quite possible.  However, futures are flat as I write this, so it remains to be seen. 

A breach above 1263.21 would negate this blue "1-2?" count, however it would not necessarily negate the potential for more downside.  Under the preferred count, a break of 1263 would only indicate that wave (ii) up is still unfolding -- wave (i) down can only be KO'd with a break of the October highs. 

In the search for other possibilities, I realized that, with a slight shift of viewpoint, it is technically possible that this is still Wave 4 of (i) down.  Below, I have annotated the Dow chart to show how this is possible, and also sketched in some annotations to show how Wave 5 might stair-step lower:

The arguments comparing Wave 4 vs. Wave (ii) are pretty simple:  In favor of Wave (ii), we have the deep retracement of the prior decline (62%); this is an unusually deep retracement for a fourth wave.  In favor of Wave 4, we have the sloppy structure of the retracement; second waves are usually sharper and cleaner.  I am favoring the Wave (ii) scenario by roughly a 60% to 40% margin. 

Also arguing in favor of the entire bear case, are Apple's chart and copper's chart.

There are also, of course, possible bullish interpretations to the current market (there always are, otherwise this would be ridiculously easy and I could have all my charts done in an hour!), but unless the market gives us some reason to start favoring those interpretations, I see no reason to spend too much time worrying about them at the moment.  The key levels to watch are still the October high and the November low.  The chart below shows my main bullish alternate count and the key levels to watch:

These are historic times, and this is a historic market.  There is potentially a lot hinging on what happens to the market over the coming days.  If there's one thing that makes me the most nervous here, it's that my calls have been dead-on hits for a while now -- so these are the times I start to feel "due" for a miss.  If the landscape suddenly seems to be changing dramatically, I will do my best to alert you to the changes, and on how they may impact future projections.  Trade safe!  

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

Apple Update, 11-6-11: Studying Apple at Three Degrees of Trend

Much as I like Apple as a company, and mourned the death of Steve Jobs -- Apple's chart is not looking terribly promising for bulls.  When discussing the issue with a friend, one of the topics that came up is how Apple really is (or was) Steve Jobs.  The last products that Jobs had a direct hand in will be released in the fairly near future; and the charts seem to be indicating that either Apple will not recover well from his loss, or the world is going south fast.

From a broader market standpoint, Apple is clearly a huge market leader.  When Apple starts looking sick, it's not a good sign for the broad market.  In my opinion, Apple's charts are pretty clear that lower prices are coming.  By corollary, we can assume that this means lower prices for the broads as well. 

The most bullish short term scenario I can currently see would be if AAPL is forming an a-b-c lower (with wave a and b complete) for wave B of e.  I realize that my labeling of "e" may not fit the traditional Elliott nomenclature; sometimes I label things more for clarity of comprehension for those not overly versed in EWT.  (See wave "e" on daily chart, below... this is the same chart I posted when I called the top in Apple on October 18th).  I would give the B of e scenario maybe 15% odds.

On the 10 minute chart, it again appears that Apple is due more downside, which jives with the conclusion that the October high marked a significant top.  Early targets point to 350-373, though could easily stretch much lower.  Here, the most "bullish" short term scenarios I can see would be:

1)  This is part of an a-b-c as mentioned above (unlikely).

2)  Red Wave ii extends upward in some fashion (but stays below the October highs) before breaking the recent lows (very unlikely).

3)  Red Wave ii is actually a fourth wave, so we make a marginal new low (see black "Alt: 1") then rally slightly before we head down in earnest (possible, but unlikely due to the structure of the move down so far).

The one-minute chart below zooms in on the most current wave structure since Oct 30, and explains why I think the "Alt: 1" scenario shown above is less likely... though still possible:

All in all, I think AAPL presents a very clear case for lower prices.  In my opinion, this is about as good as it gets, chart-wise.  Nothing's 100%, but this chart series is the type that makes you lean into the 90% category.  It's always possible I'm wrong, but I would be absolutely shocked if Apple's next significant move isn't down.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

You'll Never Catch Me, Copper!

Several readers have asked me to draw a chart for copper.  I've actually been working on one for a while, and finally decided to finish it tonight. 

Copper looks, in the words of the famous sheep, "Baaaaaad."  Copper seems to have topped at Cycle degree in 2011 (red "5" label, for Primary Wave 5).  If this count is correct, 2011 marks a major historical top.  To complete the top, copper seems to have put in an extended Wave V of 5, a fairly common occurence in commodities.

Copper's MACD histogram recently rose to -- and is now falling down from -- the highest reading in copper's entire history.  This strongly implies that the bulls have shot all their bullets for the time being.

Concurrent with the MACD peak, copper also appears to have completed a nested fourth wave at minuette degree.  The series of 1-2's I've labeled at the start of the decline this year could all be counted as a leading diagonal wave I at intermediate degree (blue I) -- but I honestly think these waves count much better as a nested 1-2 series.  Either structure is bearish, though, and calls for lower prices.  Due to the threat of overlap at blue waves 1 and 4 (assuming my count and labeling are correct), it appears almost certain that copper has now completed its entire wave 4 rally and should head lower.  

The chart's top panel shows the SPX.  Copper and the SPX have been strongly correlated since 2007.

Copper seems to be hinting that the stock market's

Minor Wave (2) rally ended on October 27.

The completion of red Minute iii is copper's next target, at roughly 2.79.  Percentage-wise, this target lines up very well with the current expected leg down in the stock market.  Copper's red Minute iii will likely bottom as the SPX bottoms Minute Wave i of Minor (3).

Trade above 3.75 would indicate Wave 4 is still unfolding; trade above 3.81 would call the blue 1-2-3-4 labeling into question.  Trade above 3.85 (in the near future) would be problematic for the entire count.

At the minimum, copper should ultimately revisit the 2008 lows again.  It could go a lot lower.

Please note that the little bit of sketched-in price lines I've drawn are certainly not intended to be time-accurate.  With the long-term chart, I simply didn't have room to draw it in a fashion even approaching an accurate estimation of time.

I have to tell you, after studying this chart (and several others) tonight, I am favoring my preferred bearish count in the stock market even more.

As a sidenote, some readers have asked how to bring the charts up in larger format.  To do so, simply right-click and select "Open in New Tab" (or "window").  This tiny default frame is Blogger's doing, not mine -- but that's how you can get around it.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

Two possible counts of today's action...

Note: This is just a super-quick update for my regular readers, regarding Friday's action.  I'm leaving out all the descriptions and explanations -- so if you're a new reader, please see yesterday's article for context and more detail.

As I see it, there's really two main options left for describing today's move:

1) the morning waterfall was an impulse wave down with an extended fifth wave.

2) the decline was an a-b-c (x) wave.

My preferred view is that it was an extended fifth, and the snap-back rally is either over, or almost over.  New lows would follow. 

Yesterday's high is the knockout for the extended fifth preferred count.  If the decline was an (x) wave, we are forming a triple zigzag for preferred wave (ii) and could still go as high as last Thursday's top.  Monday will probably answer this question... but I wanted to hear any comments or thoughts.  (Plus I wanted to move yesterday's lengthy discussion to a new thread.)

SPX and NDX Update: Retracement Rally Hits Targets; Top May Be In

While the rally keeps hitting my targets perfectly, it is doing so in a very "ugly" fashion, and has now made charting the next move a bit difficult.  Some moves are clean and a pleasure to chart... other moves make you want to take up a new career; ideally one that involves counting things that are really large and not open to interpretation, like elephants.  This is one of those moves.  But I hear the Elephant Wave Theory field is flooded with applicants right now, so I guess I'm stuck.

The top may be in, but with the wave structure so messy, it's hard to predict a direct and immediate reversal.  After cross-studying a number of indices, I'm open to the idea that there's one more new high coming -- but I'd give maybe 55% odds to the new high, and 45% odds to the rally being complete.  If you forced me to give exact targets for any new highs, I would say 1267 SPX and 2385 NDX -- so it’s probably safe to say that the rally is, effectively, over. 

The rally retraced right into my target zones, so whether it reverses immediately or continues slightly higher, I'm content with that for now.

If by some chance you're just joining the discussion, it would be helpful to familiarize yourself with The Big Picture chart, which has tracked well enough so far that I haven't felt the need to update it in over a month.  That article also contains a brief introduction to Elliott Wave Theory (unfortunately, however, it contains nothing on Elephant Wave Theory).

The first chart is the SPX chart, with the best-fitting way I can find to label the jumbled mess that has been this rally.  On this chart, you can see that it appears the SPX is in its final wave up, so it may have topped yesterday.  Just going off this chart, one could be fairly convinced that the rally is over.  The NDX chart (the last chart shown) looks like it might need another high, which is one reason I’m split on the two views.

If this is indeed a second wave retracement rally, the only rule by Elliott standards is that it doesn't exceed the top; i.e.- last Thursday's high.  Second waves are allowed to retrace 100% of the prior move (but not over)... so the targets posted are my preferred view, but the rally is free to exceed them if it wants.

For several days, I have also been showing the chart which has the alternate bullish interpretation of the current wave structure.  I remain disturbed by the fact that the decline off last Thursday's high can count so well as an a-b-c... however, if that's what it was, it was a very forceful correction... but C-waves are known to trick people, even technicians, into believing the trend has changed.  I am still giving this alternate count (chart below) about 30% odds.  A move below 1197 SPX will knock this count out.

One more chart of the SPX, then I'll move onto the NDX.  The next chart shows a longer-term view of the SPX and how it has once again gravitated back into the area of the head and shoulders neckline.  Depending on how one draws the neckline (intra-day lows or closing lows), we are either there already, or a few points away.  It will be interesting to see how the SPX responds to this area now that it has been violated once previously.  Theoretically, this area should still be a battleground and potential reversal zone.

The final chart is the short-term NDX chart.  The NDX is also in the zone where we could expect a reversal.  On this chart, I have sketched in a possibility as to what may happen today/Monday, if a new high is coming.  It appears possible that the NDX might be in the midst of a small wave iv.  IF that's the case, and due to the wave structure, that's a big "if" -- the market would start the morning off with some sideways/down action, which should eventually resolve to the upside.  Again, the NDX has already hit its expected targets, and the rally may be fully complete, so additional upside may or may not be forthcoming. 

If we head down hard at the open, and particularly if the NDX trades below 2347, I would no longer expect new highs.  Of course, that would be barring some even stranger pattern formation going forward, such as the (z) wave of a triple three or zigzag.  Triple zigzags are pretty rare, though.

Again, if the preferred count is correct, the ultimate resolution to all of this will be new lows on all the indices.  Beyond that, not much to add over yesterday's article.  Trade safe!

SPX Update: Slight Adjustment Still Leaves the Big Picture Bearish

As I opined many times in the past, there was no new Quantitative Easing program announced by the Fed on Wednesday.  In fact, the Fed announced only one new program yesterday, titled "Operation: Huh?"  Under the terms set forth in "Operation: Huh?" the Fed has finally agreed to start openly admitting that it's basically clueless about everything.  I, for one, think this is a huge step forward, and possibly the most helpful program to come out of a Fed meeting in at least fifteen years.

The charts suggested ahead of time that there would be no fireworks on Wednesday, and both the S&P 500 (SPX) and Nasdaq 100 (NDX) wandered their way up into the target ranges I had posted in Tuesday's update.  The NDX barely squeaked in, tagging my suggested target range by only one point.  Yesterday's targets were, relatively, easy; now things get a little more complicated.

After spending a lot of time last night and this morning on cross-market studies of other indices, currencies, and a few commodities, I have switched yesterday's alternate count into the preferred role.  My preferred view is that this is wave (ii) up, instead of wave 4.  The wave 4 count has now flipped into the alternate position, and is shown on the chart by the black "Alt" labels.  If this is the fourth wave, a marginal new low should follow this rally.  If that's the case, the market is less likely to stage a deep retracement of the prior decline; in fact, any trade above 1264 would knock this count out.

If the indices are forming a fourth wave, there is no telling what they'll do.  To give you an idea of why I say this: the trading range from August until the October low was a fourth wave (of much larger degree, obviously).  If you look at a six month chart, you can see that the only thing that was clearly defined about that move, in retrospect, was the trading range.  Other than that, the indices meandered about for months, almost in a seemingly random fashion.  Due to their somewhat unpredictable nature, fourth waves can be difficult trading environments.

The two targets I like for the preferred wave ii count are 1256 and (if 1256 is violated convincingly) 1267.  I've also drawn up a simple support/resistance chart showing some areas that may create battlegrounds in the future.  This chart also highlights why I like 1267 as a possible target.

I am forced to forego the NDX chart in this update, because I simply ran out of time -- however the NDX should trade roughly in concert with the SPX.  The last chart I'll present is my more bullish alternate count, which is still hanging in there, and has actually moved up a notch to 30% odds.  Unfortunately, the market never reached the level required to knock this count out, so it continues to remain viable.  This count suggests there's one last rally to new highs unfolding now.

In all of the above cases, the expected resolution after the rally ends is a deep decline to new lows.  Once the top is in, I can start calculating targets for the each of the coming legs down.  Trade safe!

The original article, and many more, can be found at http://pretzelcharts.blogspot.com/